Brief of the Case
Delhi High Court held In the case of YUM Restaurants (India) Pvt. Ltd. vs. ITO that both entities i.e Yum Asia and Yum Singapore which hold the shares of assessee, Yum India, for pre and post restructuring period respectively, were distinct entities. Although they might be AEs of Yum USA, the ultimate holding company, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of ‘piercing the veil’ at the instance of assessee does not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of Section 79, Yum India cannot be permitted to set off the carry forward accumulated business losses of the earlier years.
Facts of the Case
The Assessee, Yum Restaurants (India) Private Limited (Yum India), is part of the Yum Restaurants Group with its ultimate holding company being Yum! Brands Inc. USA (Yum USA). 99.99% of shares of Yum India were initially held by Yum Restaurants Asia Private Limited (Yum Asia). After 28th November 2008, the shares were held by Yum! Asia Franchise Pte. Ltd. Singapore (Yum Singapore) pursuant to a restructuring within the group. Yum India had a licence arrangement with Kentucky Fried Chicken International Holdings Inc. (KFC) and Pizza Hut International LLC (Pizza Hut) for opening KFC and Pizza Hut Restaurants in the Indian sub-continent. The licences were later assigned by KFC and Pizza Hut to Yum Asia. Subsequently it was assigned by Yum Asia in favour of Yum Singapore with effect from August 2008. Yum India also entered into an agreement with Yum Asia and subsequently with Yum Singapore with effect from August 2008 for the provision of support to Pizza Hut, KFC and ANW in South Asia.
It is stated that the group decided to hold shares in Yum India through Yum Singapore and, therefore, the entire share holding in Yum India was transferred from one holding company, viz., Yum Asia to another immediate holding company, Yum Singapore, although the ultimate beneficial owner of the share holding in Yum India remained the holding company viz., Yum USA. Further It is stated that Yum Restaurants Marketing Private Limited (‘Yum Marketing’) was formed as a wholly owned subsidiary of Yum India after obtaining all necessary approvals of the Government of India. Yum Marketing is stated to operate on a ‘no profit basis’ for carrying out advertising, marketing and promotion (‘AMP’) activities on behalf of Yum India, its franchisees and business associates in India.
During the AY in question i.e. 2009-10, Yum India contributed Rs.4,79,48,122 to Yum Marketing for its ‘equity segment’. According to Yum India since this was a purely domestic transaction, it was not included in Form 3CEB and/or transfer pricing (TP) study for the relevant AY. Yum India filed its income tax return for AY 2009-10 on 30th March 2010 declaring a loss of Rs.18,26,77,909. After accounting for credit for taxes deducted at source in the sum of Rs.4,00,07,839, a refund was computed. The return was picked up for scrutiny. Reference was made to the TPO under Section 92CA(3). Yum India submitted a TP Study and the relevant documents to explain the pricing of its international transactions with its AEs.
By an order dated 8th August 2012, the TPO proposed a TP adjustment of Rs.6,50,13,564. This included Rs.5,27,33,344 on account of the AMP contribution made by Yum India to Yum Marketing. According to the TPO, the said sum ought to have been received by Yum India as reimbursement from its AEs on account of the creation of marketing intangibles. After referring to the losses suffered by Yum India, the TPO concluded that Yum India had not been adequately compensated for the AMP expenses incurred by it. Further the TPO was of the view that a mark-up of 9.98% should be applied to the above sum. Consequently, the TPO recommended an adjustment of Rs.5,27,33,344 to the arm’s length price (‘ALP’) of the ‘international transaction’ on ‘account of contribution of brand building expenses.’ For this purpose, the TPO considered the comparable ALP as ‘Nil’. The AO accepted the recommendation of the TPO and issued a draft assessment order dated 28th March 2013 under Section 144(3) read with Section 144C(1) of the Act. The total income of Yum India was determined at Rs.40,65,40,535. In doing so the AO, inter alia, disallowed the set off and carry forward of business losses incurred till AY 2008-09. Separately, the AO also made a disallowance of Rs.6,05,01,229 towards payment made to Yum Marketing under Section40A(2)(b) of the Act which again included AMP contributions made by Yum India to Yum Marketing.
The case of Yum India, however, has been that it is a separate entity undertaking an entrepreneurship function for promoting its own business. It is claimed that Yum India does not undertake any purchase transactions from its AEs. It is further claimed that AMP is an intrinsic function of Yum India. The further case of Yum India is that the TPO did not apply any prescribed method for taking the comparable ALP to be ‘nil’ and treating it as an international transaction.
Held by DRP
The DRP upheld the conclusions reached by the AO and rejected Yum India’s submission as regards set off and carry forward of business losses. The proposed TP adjustment was also upheld. However, the alternative plea of Yum India that the same AMP expenses could not be disallowed twice, i.e., once as a TP addition and secondly as disallowance under Section 40A(2)(b) of the Act was upheld. Accordingly, the DRP directed that the TP addition of Rs.5,27,33,344 be deducted from the disallowance of Rs.6,05,01,229 under Section 40A(2)(b). A net disallowance/addition of Rs.77,67,895 was made under Section 40A(2)(b).
Held by ITAT
The ITAT upheld the disallowances of the carry forward of business losses of earlier years. The ITAT referred to the change in immediate share holding of Yum India from Yum Asia to Yum Singapore and held that by virtue of Section 79 of the Act, since there had been a change of more than 51% of the share holding pattern of the voting powers of shares beneficially held in AY 2008-09 of Yum India, the carry forward and setting off of business losses could not be allowed. As regards the TP adjustment, the ITAT followed the decision of its Special Bench in LG Electronics India Pvt. Ltd. v. ACIT 2013 152 TTJ (Del) (SB) 273 and directed the AO to decide the question afresh after allowing the Assessee a reasonable opportunity of being heard.
Held by High Court
Issue of carry forward of accumulated losses
High Court held that the ITAT has in the impugned order analysed Section 79 and noted that the set off and carry forward of loss, which is otherwise available under the provisions of Chapter VI, is denied if the extent of a change in shareholding taking place in a previous year is more than 51% of the voting power of shares beneficially held on the last day of the year in which the loss was incurred. In the present case, there was a change of 100% of the shareholding of Yum India and consequently there was a change of the beneficial ownership of shares since the predecessor company (Yum Asia) and the successor company (Yum Singapore) was distinct entities. The fact that they were subsidiaries of the ultimate holding company, Yum USA, did not mean that there was no change in the beneficial ownership. Unless the Assessee was able to show that notwithstanding shares having been registered in the name of Yum Asia or Yum Singapore, the beneficial owner was Yum USA, there could not be a presumption in that behalf.
High court further held that both entities i.e Yum Asia and Yum Singaporewere distinct entities. Although they might be AEs of Yum USA, there is nothing to show that there was any agreement or arrangement that the beneficial owner of such shares would be the holding company, Yum USA. The question of ‘piercing the veil’ at the instance of Yum India does not arise. In the circumstances, it was rightly concluded by the ITAT that in terms of Section 79 of the Act, Yum India cannot be permitted to set off the carry forward accumulated business losses of the earlier years.
High Court held that after the decision in Sony Ericsson Mobile Communication India P. Ltd. (2015) 374 ITR 118 (Del), the adoption of the BLT for determining the existence of an international transaction involving AMP is expenses no longer legally permissible. In that scenario, there would be a need for a detailed examination of the operating Agreement between Yum India, Yum Marketing and the franchisees to ascertain if any part of the AMP expenses is for the purpose of creating marking intangibles for the AE of Yum India. It is only after an international transaction involving Yum India and its AE in relation to AMP expenses is shown to exist, that the further question of determining the ALP of such international transaction would arise.
It is not possible to state that the Revenue has not placed any material to even prima facie show the existence of an agreement regarding AMP expenses. The question however remains whether it discloses an international transaction between Yum India and its AE in regard to AMP expenses for creating of marketing intangibles for the AE. If it is shown to exist the further question would be whether it is at ALP. The submission on behalf of Yum India that for that purpose, the franchise marketing model of JFL is an ideal comparable would then require to be considered. Accordingly, matter remanded back.
Accordingly appeals disposed of.